Andrew Bailey, chief executive of the Prudential Regulation Authority, told the committee he had put senior Co-op Bank management “on notice” about capital problems in 2011, when he was deputy head of the prudential business unit and director of UK banks and building societies at the former Financial Services Authority.
In what MPs described as a “powerful” and “gripping” testimony, Mr Bailey suggested the board had taken a “looser approach” than other institutions to the issue.
Giving evidence to the committee’s inquiry into Project Verde, Mr Bailey said: “A number of people at senior levels in the Co-op are saying, ‘Now that we look at it, we realise there were problems’, but there may have been an attitude that you can outsource risk management to the regulators.
“There is the risk that senior management will say, ‘You cannot really expect us to see the problem until you come along and tell us – I reject that proposition’.”
Mr Bailey said he suspected Barry Tootell, former chief executive of Co-op Bank, only realised “his misjudgments” on Britannia’s toxic assets in December 2012, three years after the two institutions merged.
Britannia’s impaired loan book was deemed by Mr Bailey have been the “root cause” of Co-op Bank’s downfall. He argued that the building society’s desire to expand into “racier markets” was driven by low margins on traditional lending business, exacerbated by a “febrile” financial climate in 2008 and 2009.
Colin McCallum, adviser at Edinburgh-based Heritable, said: “No one could have foreseen the overall financial crisis at the time. But at board level, they should have been looking at their capital position the whole time. This is extremely important.”